Lean Startup Movement Is Changing the Way Investors Think

by Doris Lin

It has been difficult for entrepreneurs to break away from following the footsteps of a “visionary” entrepreneur to become a lean entrepreneur, because investors have been really attracted to backing individuals who possess visionary characteristics. Investors favored individuals who were passionate, optimistic and bold, many of which were qualities that exemplified the most successful entrepreneurs. The large emphasis investors placed on strength of the vision/idea in conjunction with the entrepreneur’s traits may be a function of the lack of a more scientific way to evaluate the likelihood of success of a venture - investors had to take more of a leap of faith.

The lean startup movement has now paved a way for investors to scientifically evaluate a start-up’s potential for success by shifting the focus from the vision to the execution/process. Thus, investors can evaluate the likelihood of success based on early evidence in the company’s ability to discover, learn and iterate through early, inexpensive tests focused on testing hypotheses. It becomes more about trusting the entrepreneur’s ability to execute the discovery/learning process and evaluating them based on the incremental progress made towards refining a vision rather than assessing the probability of achieving a stated vision delivered in a sales pitch.

Flexibility and openness to pivoting are essential in a lean startup, so investors will also need to adopt this in order for entrepreneurs to truly embrace the lean startup methodology. The benefit of having a flexible end vision is the opportunity for the company to focus on what matters most and quickly shift to a new strategy without the pressure to stay the course in fear of destroying credibility. If investors continue to focus primarily on the entrepreneur’s initial stated vision, there is more pressure for the entrepreneur to deliver that at all costs. This increases the likelihood that the entrepreneur falls into a distorted reality that could lead to failure.

This was evident in Steve Carpenter’s early mistake with Cake Financial where he failed to solicit user feedback and focused on obtaining comprehensive data for investment recommendations since he focused on proving his original value proposition. In contrast, Mint.com’s user-centric, flexible approach enabled them to hone in on the other features that proved to be more valuable to users. Even though Mint may not have delivered fully on their original value proposition, they were able to succeed by delivering on another vision that mattered more to users.

We see signs that investors will be focusing on investing in entrepreneurs mastering the lean process based on Carpenter’s recent raise of $4.25M for his latest startup Endorse (tested out in classic lean fashion). Investors can take more comfort in investing in lean entrepreneurs because even if the original vision is not achieved, the entrepreneurs are equipped with the framework/tools to adapt and achieve the right vision. As investors change their evaluation criteria in favor of lean, entrepreneurs should have an easier time adopting the lean methodology since they are forced to demonstrate traits of being both a visionary and a design-driven executor.

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